Brakke v. Economic Concepts























Filed 1/15/13 Brakke v.
Economic Concepts CA4/3













NOT TO BE PUBLISHED IN OFFICIAL REPORTS







California Rules of Court, rule 8.1115(a), prohibits
courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115>.







IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA



FOURTH
APPELLATE DISTRICT



DIVISION
THREE


>

JAMES G. BRAKKE, Individually and as Trustee, etc., et al., Plaintiffs and Appellants, v. ECONOMIC CONCEPTS, INC., Defendant and Respondent.

G045846 (Super. Ct. No. 30-2009-00315313) O P I N I O N

Appeal
from a judgment of the Superior Court of href="http://www.adrservices.org/neutrals/frederick-mandabach.php">Orange
County, Gregory H. Lewis, Judge. Application to appear as counsel pro hac
vice. Motion to strike portions of
Appellants’ Opening Brief. Judgment
affirmed. Application granted. Motion denied.

Crandall,
Wade & Lowe, James L. Crandall and Geoffrey T. Hill for Plaintiffs and
Appellants.

Peitragallo
Gordon Alfano Bosick & Raspanti, Robert D’Anniballe, Jr.; Lewis Brisbois
Bisgaard & Smith, Lisa Willhelm Cooney and Ruben Tarango for Defendant and
Respondent.

* * *

Plaintiffs James G.
Brakke, Matthew F. Schafnitz, Kevin McWilliams, and Charles R. Fosdick are the
principals of Dealer Management Group, Inc., a subchapter S corporation. Brakke also served as the trustee of the
firm’s defined benefit pension plan.
Plaintiffs sued defendants American General Life Insurance Company
(American General), Economic Concepts, Inc. (ECI), and three other
parties. The first amended complaint
alleged the defendants persuaded plaintiffs to establish the pension plan by
representing contributions to the plan were tax deductible under the Internal
Revenue Code. Subsequently, the Internal
Revenue Service (IRS) determined the pension plan failed to qualify for
favorable tax treatment, resulting in plaintiffs paying back taxes and
penalties.

The
amended complaint contained causes of action for href="http://www.mcmillanlaw.com/">fraud, negligent misrepresentation, breach
of fiduciary duty, negligence, and a violation of California’s
unfair competition law. American General
filed a demurrer in which ECI joined.
The trial court sustained the demurrer without leave to amend and
dismissed the action as to these parties.


Plaintiffs
appealed, but later settled with American General and dismissed the appeal as
to it. Arguing they can “allege that the
IRS has long criticized many of

the . . . features that characterized th[eir pension
p]lan” and “at the very least, [d]efendants had to have had serious concerns
about whether contributions to the [p]lan would be tax deductible,” plaintiffs
contend the trial court erred by declining to grant leave to amend the
complaint as to ECI. We conclude the
trial court properly ruled on the demurrer and affirm the judgment.

Robert
J. D’Anniballe, Jr., applied to appear as counsel pro hac vice for ECI. We granted his application. ECI moves to strike material from plaintiffs’
opening brief. This motion is
denied. When an appellate brief contains
references to matters not supported by the record on appeal, we can simply
ignore these references rather than strike them. (Cal. Rules of Court,
rule 8.204(e)(2)(C); Connecticut> Indemnity >Co.> v. Superior Court (2000) 23 Cal.4th 807, 813, fn. 2.)



FACTS
AND PROCEDURAL BACKGROUND



According
to the amended complaint and its attached exhibits, ECI markets and administers
pension plans, including plans designed to comply with former section 412(i) of
the Internal Revenue Code (former 26 U.S.C. § 412(i), now 26 U.S.C.
§ 412(e)(3); hereinafter 412(i) plan).
In late 2002, ECI’s managing agent, Ken Hartstein, contacted plaintiffs
about establishing a defined benefit pension plan for Dealer Management Group,
Inc. Attached to the amended complaint
as exhibit A and incorporated by reference were ECI’s 412(i) defined benefit
plan marketing materials received by plaintiffs.

The
amended complaint alleged Hartstein touted ECI’s expertise in developing
pension plans, purportedly telling plaintiffs its “412(i) [p]lan was legal and
complied with the tax code,” and “annual contributions to their
. . . [p]lan [in the form of policy premium payments] would be
tax deductible.” ECI’s marketing
materials declared ECI “has secured a letter opinion of ‘more likely than not’
from” a named law firm, and “[a]ll participating employers in the
. . . [p]lan will receive an individual IRS letter opinion
approving the plan.”

Alleging
that they relied on Hartstein’s representations and similar statements made by
agents of the other named defendants, plaintiffs created their defined benefit
pension plan trust in 2003. Attached to
the amended complaint as exhibit B and incorporated into it by reference is a
2010 agreement between the pension plan and the IRS. According to the agreement, plaintiffs’ plan
was “designed to be a fully insured plan under . . . section
412(i),” and it “received a favorable determination letter dated

August 21, 2003
with respect to the language in the [p]lan.”
Plaintiffs funded the plan by purchasing a life insurance policy from
American General, paid the premiums for the policy, deducted these payments on
tax returns in 2004 and 2005, and paid administrative fees to ECI and another
defendant.

In
2006, the IRS audited plaintiffs’ 412(i) plan.
Citing a 2004 revenue ruling, the IRS concluded the plan failed to
comply with certain requirements of former section 412(i) and disallowed the
2004 and 2005 deductions. As a result,
plaintiffs incurred damages, including costs related to the IRS audit and
payment of back taxes and penalties.

Plaintiffs
sued ECI and others alleging the statements by Hartstein and other agents were
false and defendants “knew them not to be true or had no reasonable ground for
believing them to be true.” American
General’s demurrer, in which ECI joined, argued in part “[p]laintiffs’ claims
. . . fail as a matter of law because they are based on
unactionable future predictions of tax law upon which [p]laintiffs could not
have justifiably relied.”

The
trial court sustained the demurrer without leave to amend and dismissed the
action as to these defendants. Citing
federal district court decisions dismissing similar lawsuits, the court’s
minute order explained: “All of the
causes of action are based on defendants’ alleged misrepresentations made in
2002 and 2003 concerning the tax consequences of the
. . . [p]lan,” and “[i]t was not until 2004 that the IRS issued
[r]evenue [r]ulings and [p]roposed [r]egulations under which the [p]lan was
declared unlawful . . . .
Plaintiffs have not shown how they can amend to show that the

representations made by the defendants were misrepresentations, or
how, even if the representations could be considered
. . . representations of fact and not mere future predictions,
plaintiffs could have reasonably relied on them.”

DISCUSSION



When reviewing a
judgment of dismissal based on the sustaining of a demurrer without leave to
amend, an appellate court first exercises its independent judgment to determine
“whether the name="citeas((Cite_as:_176_Cal.App.4th_1502,_*">complaint states a cause of
action as a matter of law.
[Citation.]” (>McMahon v. Craig (2009) 176
Cal.App.4th 1502, 1508-1509.) “‘We
treat the demurrer as admitting all material facts properly pleaded, but not
contentions, deductions or conclusions of fact or law. [Citation.]
We also consider matters which may be judicially noticed.’ [Citation.]
Further, we give the complaint a reasonable interpretation, reading it
as a whole and its parts in their context.
[Citation.] (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) If an appellate court concludes the complaint
fails to state a cause of action, it must decide “whether there is a reasonable
possibility that the defect can be cured by amendment: if it can be, the trial court has abused its
discretion and we reverse; if not, there has been no abuse of discretion and we
affirm. [Citations.] The burden of proving such reasonable
possibility is squarely on the plaintiff.
[Citation.]” (>Ibid.)


While
not expressly acknowledged, plaintiffs apparently agree that all of the amended
complaint’s causes of action are premised on the representations allegedly made
by Hartstein for ECI and by the agents of the other named defendants. Both parties also recognize, “‘[t]he
necessary elements of fraud are: (1)
misrepresentation (false

representation, concealment, or nondisclosure); (2) knowledge of
falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4)
justifiable reliance; and (5) resulting damage.’ [Citations.]”
(Alliance Mortgage Co. v. Rothwell
(1995) 10 Cal.4th 1226, 1239, fn. omitted.) “‘[F]alse representations made recklessly and
without regard for their truth in order to induce action by another are the
equivalent of misrepresentations knowingly and intentionally uttered.’ [Citation.]”
(Engalla v. Permanente Medical
Group, Inc. (1997) 15 Cal.4th 951, 974.) The elements at issue here are whether
defendant made actionable misrepresentations concerning the favorable tax
consequences of the 412(i) plan and, if so, whether plaintiffs reasonably
relied on these representations.

This
lawsuit arose from the failure of plaintiffs’ pension plan to qualify for
favorable tax treatment. A 412(i) plan
is “an employer-sponsored defined benefit plan that provides retirement and death
benefits to its participants . . . . To qualify
as an insurance contract plan under § 412(i), the plan must meet certain
requirements listed in the statute, including that the defined benefits
provided by the plan must be equal to the benefits provided under each
insurance contract at normal retirement age.
[Citation.] The plan requires
careful design and ‘sophisticated actuarial calculations
. . . to determine a benefit formula that is consistent with the
employer’s objectives and budget.’
[Citation.] To create such a
plan, an employer establishes a trust to hold the plan’s assets, and the trust
uses tax-deductible employer contributions to purchase and maintain life
insurance and/or annuity policies for the plans. [Citations.]”
(Zarrella v. Pacific Life Ins. Co.
(S.D. Fla. 2010) 755 F.Supp.2d 1218, 1221.)


Focusing
on the amended complaint’s allegation Hartstein told them “contributions to a
412(i) [p]lan would be entirely tax deductible,” plaintiffs conclusorily assert
the first amended complaint alleges all of the elements for a fraud claim. For two reasons, we disagree.

First,
the amended complaint also incorporated two documents both of which contain
recitals inconsistent with the amended complaint’s reliance on Hartstein’s
alleged statements. Both exhibit A,
ECI’s marketing materials, and exhibit B, the 2010 settlement agreement between
IRS and plaintiffs’ defined benefit pension plan, reflect plaintiffs would and
did receive opinion letters stating their plan “‘more likely than not’” qualified
for favorable tax treatment. While the
“allegations [of a complaint] must be accepted as true for purposes of
demurrer,” the “facts appearing in exhibits attached to



the complaint
will also be accepted as true and, if contrary to the allegations in the
pleading, will be given precedence.
[Citation.]” (>Dodd v. Citizens Bank of Costa Mesa
(1990) 222 Cal.App.3d 1624, 1626-1627; see also Alphonzo E. Bell Corp. v. Bell View Oil Syndicate (1941) 46
Cal.App.2d 684, 691 [“All these conclusions of the pleader are contrary to
the express terms of the instrument . . . which is pleaded in
full and made a part of the complaint” and “[u]nder these circumstances the
court will, in hearing on the demurrer, examine the exhibits and treat the pleader’s
conclusions as surplusage”].)

Second,
the amended complaint and the incorporated exhibits reflect the representations
concerning favorable tax treatment for plaintiffs’ 412(i) plan by ECI and the
other defendants occurred in 2002 and 2003.
Plaintiffs established their pension plan at that time. The IRS did not audit the plan and conclude
it failed to qualify for favorable tax treatment until 2006. Further, the IRS’s decision was based on a
February 2004 revenue ruling. (Rev. Rul.
2004-20, 2004-1 C.B. 546 [section 412(i) Plans; Deductibility; Listed
Transactions].) That ruling expressly
dealt with the deductibility of 412(i) plans and declared “a qualified pension
plan cannot be a section 412(i) plan if the plan holds life insurance contracts
and annuity contracts for the benefit of a participant that provide for
benefits at normal retirement age in excess of the participant’s benefits at
normal retirement age under the terms of the plan.” The same day the IRS released this ruling, it
also issued Revenue Procedure 2004-16, 2004-1 C.B. 559 (Fair Market Value;
Distributions; Qualified Retirement Plans).
Acknowledging “[t]he current regulations do not define ‘fair market
value’ or ‘entire cash value’ and questions have arisen regarding the
interaction between these two provisions,” Revenue Procedure 2004-16>, supra, “provide[d] interim guidance on
how fair market value may be determined in the instance of distributions from a
qualified retirement plan.”

In >Berry v. Indianapolis Life Insurance Company
(N.D. Texas 2009) 638 F.Supp.2d 732, a federal district court dismissed fraud
and negligent misrepresentation

claims in
multi-district litigation based on factual allegations similar to those
presented in this case. >Berry held “as a matter of law,
regulations and rulings by the IRS in 2004 and 2005 cannot be used to show that
statements or omissions purportedly made in 2001 and 2002 were false when
made . . . . The amended pleadings
. . . lead to only one conclusion, that is, the
. . . [p]laintiffs are, indeed, alleging that [the defendant
insurer’s] agents were giving opinions regarding future tax treatment by the
IRS,” and “‘[a]s a matter of law, any representation or prediction by any
. . . agent as to how the IRS would treat the 412(i) plans, and
the funding thereof, in the future is either an non-actionable opinion or was
unjustifiably relied upon.’
[Citation.]” (>Id. at p. 739.) The only significant distinction between >Berry and this case is that ECI’s agent
made representations concerning the favorable tax treatment for plaintiffs’
412(i) plan in 2002 and 2003 rather than 2001 and 2002. Consequently, as the Berry court concluded “[p]laintiffs have failed to explain why
the alleged representations by [ECI’s] agent[] were false when made
. . . .” (>Id. at p. 738.)

Plaintiffs
cite the exceptions to the general rule that, to be actionable, a
misrepresentation must be of an existing fact, not an opinion or prediction of
future events. (Nibbi Brothers, Inc. v. Home Federal Sav. & Loan Assn. (1988)
205 Cal.App.3d 1415, 1423.) They
arise “(1) where a party holds himself out to be specially qualified and the
other party is so situated that he may reasonably rely upon the former’s
superior knowledge; (2) where the opinion is by a fiduciary or other trusted
person; (3) where a party states his opinion as an existing fact or as implying
facts which justify a

belief in the truth of the opinion.
[Citation.]” (>Borba v. Thomas (1977) 70
Cal.App.3d 144, 152.) But in an
earlier published ruling in the Berry
litigation (Berry v. Indianapolis Life
Insurance Company (N.D. Texas 2009) 600 F.Supp.2d 805), the district court
held the foregoing exceptions did not apply in this context because “it is
inherently unreasonable for any person to rely on a prediction of future IRS enactment,


enforcement,
or non-enforcement of the law by someone unaffiliated with the federal
government. As such, the reasonable
reliance element of any fraud claim based on these predictions fails as a
matter of law.” (Id. at p. 819, fn. 19; see also Holder v. Home Sav. & Loan Assn. (1968) 267 Cal.App.2d 91,
106-107 [“reliance may be made by a buyer of real estate upon representations
as to existing tax liens, amounts of taxes for current or prior years, or
assessed values for current or former years,” but “[t]he rule is different as
to statements with regard to future assessments or levies of taxes” because
“[t]he fixing of assessed values of property and of tax rates is solely within
the power name="citeas((Cite_as:_267_Cal.App.2d_91,_*107">of public officials, whose
decisions are not and should not be subject to control by a property owner, so
that representations made by a private person as to such matters may not
justifiably be relied on”].)

We
agree with the holdings in the Berry
cases. Plaintiffs have failed to allege
the statements by defendants’ agents concerning the favorable tax treatment of
plaintiffs’ 412(i) plan were false when made and, to the extent they could be
so construed, it simply was not reasonable for plaintiffs to rely on
representations concerning how the IRS would treat their pension plan in the
future.

In
support of their argument, plaintiffs cite Cohen
v. S & S Construction Co. (1983) 151 Cal.App.3d 941 and >Furla v. Jon Douglas Co. (1998) 65
Cal.App.4th 1069. These cases are
unpersuasive. In Cohen, the plaintiffs bought a view lot in a new development
controlled by the defendant, paying a premium for the parcel based on allegedly
false representations the association’s covenants, conditions and restrictions
protected the view and the architectural committee would not authorize fencing
or landscaping that would interfere with it.
Furla involved an action by
the buyer of a real estate parcel against the seller and his agent for
allegedly representing the lot to be approximately 5,500 square feet when it
was actually only 4,300 square feet.
Neither case is analogous to a situation where the defendant is making a
representation as to the

future
decision or conduct of a third party governmental agency. (Borba
v. Thomas, supra, 70 Cal.App.3d at p. 155 [“statement that there would
be no problem getting Bureau approval is a representation of future conduct of
public officials” and the plaintiff “had no right to rely on [the defendant’s]
expression of opinion concerning the future decision of the Bureau”].)

Plaintiffs
also attack our reliance on the Texas district court’s decisions in >Berry v. Indianapolis Life Insurance
Company, supra, 638 F.Supp.2d 732 and Berry
v. Indianapolis Life Insurance Company, supra, 600 F.Supp.2d 805. They note these rulings are not controlling precedent. We agree.
(Donley v. Davi (2009) 180
Cal.App.4th 447, 461.) But “[w]hile
decisions of federal courts in matters of state law are not binding on state
courts, they may be persuasive [citations.]”
(Estate of Sloan (1963) 222
Cal.App.2d 283, 293.)

As
mentioned above, the Berry cases
involved litigation brought by residents of several different states, including
California, concerning 412(i) plans subsequently disqualified by the IRS. Discussing “the substantive merits of the
fraud allegations,” Berry concluded
“the various states’ laws are sufficiently congruous to allow [common]
analysis” (Berry v. Indianapolis Life
Insurance Company, supra, 600 F.Supp.2d at p. 818), and cited >Alliance Mortgage Co. v. Rothwell, supra,
10 Cal.4th 1226 when setting forth the elements of a fraud cause of
action. (Berry v. Indianapolis Life Insurance Company, supra, 600 F.Supp.2d
at pp. 818-819.) Again, discussing the
exceptions to the general rule against basing an action for deceit on

opinions or predictions about future events, Berry cited the Court of Appeal’s decision in Borba v. Thomas, supra, 70 Cal.App.3d 144. (Berry
v. Indianapolis Life Insurance Company, supra, 600 F.Supp.2d at p. 819, fn.
19.) Thus, the Berry court applied legal principles applicable to this
action.

To
support their claim the Berry
decisions should not be followed, plaintiffs assert the district court relied
on Fisher v. Pennsylvania Life Co. (1977)
69 Cal.App.3d 506, a decision that has been criticized as wrongly
decided. (Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Development Corp.
(1995) 32 Cal.App.4th 985, 990.)
But they fail to provide any citation to where either of the federal
district court’s decisions mention Fisher. What’s more, Fisher and Greenspan are
distinguishable because they dealt with “whether a contract clause which states
that the parties relied only on representations contained in the contract
establishes, as a matter of law, that a party claiming fraud did not reasonably
rely on representations not contained in the contract.” (Ron
Greenspan Volkswagen, Inc. v. Ford Motor Land Development Corp., supra, 32
Cal.App.4th at p. 987.) That is not
the issue here.

Nor
have plaintiffs made a sufficient showing they can amend the complaint to
adequately state valid causes of action.
Citing earlier administrative materials issued by the IRS, they assert
“the IRS has long criticized many of

the . . . features that characterized” their 412(i)
pension plan and argue they could amend the complaint to allege “the IRS [had
begun] to focus scrutiny directly on [s]ection 412(i) plans” similar to their
plan. Plaintiffs contend “[d]efendants
could not predict what the IRS would do” and “should not have emphatically
promised that contributions to their [p]lan are tax deductible.” (Emphasis omitted.)

The
first cited document, I.R.S. Announcement 88-51, 1988-13 I.R.B. 34 (Springing
Cash Value Life Insurance Contracts Distributed by Employee Plans), cautioned
if “[t]he stated cash surrender value of the policy for a specified number of

years . . . is very low compared to the net single
premium (or reserve) to fund future benefits under the contract,” “the net
present value of future benefits, the replacement cost, or another valuation
method that more accurately reflects the fair market value of the rights
distributed, rather than the cash surrender value, may have to be used for
purposes of determining the taxable amounts under . . . the
[Internal Revenue] Code.” The second
document is I.R.S. Notice 89-25, 1989-1 C.B. 662 (Miscellaneous Taxability

Issues). It included “[g]uidance
. . . on miscellaneous issues generally affecting the taxation
of distributions from qualified employee plans.” Concerning the question of “[w]hat amount is
included in a plan participant’s gross income when the participant receives a
distribution from a qualified plan that includes a policy issued by an
insurance company with a value substantially higher than the cash surrender
value stated in the policy,” the IRS indicated under certain circumstances, the
value of an insurance policy’s reserves could “represent a much more accurate
approximation of the fair market value of the policy when distributed
. . . .”

These
documents do not support plaintiffs’ case.
In Berry, the plaintiffs relied
on the same earlier IRS documents to argue the defendants knew before 2004 that
statements of favorable tax treatment for the proposed 412(i) plans were
false. The district court rejected this
contention. “Announcement 88-51 and
Notice 89-25 fail

to provide the type of definitive guidance about the legality of
funding 412(i) plans

with . . . specially-designed insurance policies to
support the proposition that [the

insurer’s] agents knew that the alleged representations were false
when made . . . . In short, the Court agrees
. . . that the only definitive guidance specifically applicable
to the 412(i) plans at issue, and the alleged representation made regarding the
tax benefits and legality of the plans, appears in the IRS’s 2004 revenue
rulings and 2005 final regulations.” (>Berry v. Indianapolis Life Insurance
Company, supra, 638 F.Supp.2d at p. 738, fn. omitted.)

Finally,
plaintiffs note Berry allowed the
California plaintiffs named in that litigation to proceed with their unfair
competition law claim because they amended the complaint to rely on the false
advertising law (Bus. & Prof. Code, § 17500) and alleged “that ‘members of
the public were likely to be deceived[]’ . . . .” (Berry
v. Indianapolis Life Insurance Company, supra, 638 F.Supp.2d at
p. 741.) Again, we disagree. “Unlike common law fraud, a Business and
Professions Code section 17200 violation can be

shown even
without allegations of actual deception, reasonable reliance and damage. Historically, the term ‘fraudulent,’ as used
in the UCL, has required only a showing that members of the public are likely
to be deceived. [Citation.]” (Daugherty
v. American Honda Motor Co., Inc. (2006) 144 Cal.App.4th 824,
838.)

In >Berry, the district court found the
addition of the conclusory allegation that the public was likely to be deceived
overcame the defendants’ objection to this count. Berry
provided no further analysis on the sufficiency of the unfair competition law
count. But California cases have
recognized “‘[i]n order to be deceived, members of the public must have had an
expectation or an assumption about’ the matter in question” (>Daugherty v. American Honda Motor Co., Inc.,
supra, 144 Cal.App.4th at p. 838), and “[a]bsent a duty to disclose,
the failure to do so does not support a claim under the fraudulent prong of the
UCL” (Berryman v. Merit Property
Management, Inc. (2007) 152 Cal.App.4th 1544, 1557). Given the representations in ECI’s marketing
materials and opinion letters that its 412(i) plan “‘more likely than not’” would
qualify for favorable tax treatment, plaintiffs do not explain how they can
allege they could reasonably expect or assume the IRS would never disqualify
their plan or revise its interpretation of the tax laws. Nor do plaintiffs explain how they could
amend the complaint to allege ECI would have a duty to inform clients of the
possibility of a future change in tax law.


Therefore,
we conclude the trial court properly sustained the demurrer to the first
amended complaint without leave to amend.




DISPOSITION



The
judgment is affirmed. The application of
Robert J. D’Anniballe, Jr., to

appear pro hac
vice for respondent is granted.
Respondent’s motion to strike portions of appellants’ opening brief is
denied. Respondent shall recover its
costs on appeal.









RYLAARSDAM,
J.



WE CONCUR:







O’LEARY, P. J.







THOMPSON, J.