UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
ee eee CHRISTINA ASNYDER Catherine Jeang Laura Elias N/A Deputy Clerk Court Reporter / Recorder Tape No. Attorneys Present for Plaintiffs: Attorneys Present for Defendants: Khai LeQuang Hutson Smelley
Proceedings: DEFENDANT’S MOTION TO DISMISS FIFTH AMENDED COMPLAINT (Dkt. [166], filed January 2, 2020) I. INTRODUCTION AND BACKGROUND The Court previously set out the factual and procedural background of this case in its July 10, 2017 and November 4, 2019 orders. Accordingly, the Court only recites the background that gives rise to the present motion to dismiss. Plaintiffs filed this action against defendant Transamerica Life Insurance Company (“Transamerica”) on October 31, 2016. Dkt. 1. Plaintiffs thereafter filed a first amended complaint on March 30, 2017, dkt. 24, which Transamerica moved to dismiss on May 15, 2017, dkt. 31. On July 10, 2017, the Court denied Transamerica’s motion to dismiss plaintiffs’ first amended complaint. Dkt. 44. In the first amended complaint, plaintiffs asserted a claim for breach of contract against Transamerica based on Transamerica’s “increasing MDRs for reasons other than “expectations as to future cost factors’ and in order to “recover past losses.’” Dkt. 44 at 10. Plaintiffs alleged that Transamerica’s MDR increases violated the terms of plaintiffs’ universal life insurance policies, including by, inter alia, allowing Transamerica to circumvent the minimum guaranteed interest rate accrued on the Accumulation Values of plaintiffs’ policies. Id. at 13. The Court noted that, with respect to the policies at issue in this case which include “interest” as a cost factor that Transamerica could permissibly consider in setting the MDRs, those policies “are not reasonably susceptible to an interpretation that would preclude Transamerica from considering its interest obligations while setting MDRs.” Id, Although the Court concluded that Transamerica’s attempt to circumvent the minimum guaranteed interest rate did not give rise to a claim for breach of contract, the Court denied Transamerica’s motion to dismiss plaintiffs’ entire breach of
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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
The Brighton plaintiffs subsequently filed a third amended complaint on December 4, 2019, containing additional allegations with respect to plaintiffs’ conversion claim. Brighton, Dkt. 46. On December 18, 2019, Transamerica moved to dismiss plaintiffs’ conversion claim, and the Court denied Transamerica’s motion on January 23, 2020, concluding that plaintiffs had stated a claim for conversion. Brighton, Dkt. 47, 56.
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY fair dealing; (4) conversion; and (5) declaratory relief. Dkt. 161 (“FAC”). Transamerica filed a partial motion to dismiss on December 23, 2019. Dkt. 163 (“Mot.”). Plaintiffs filed an opposition on January 17, 2020. Dkt. 170 (“Opp.”). Transamerica filed a reply on January 27, 2020. Dkt. 175 (“Reply”). The Court held a hearing on February 10, 2020. Having carefully considered the parties’ arguments, the Court finds and concludes as follows. Il. LEGAL STANDARD A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.”” Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. (internal citations omitted). In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory “factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.”). Ultimately, “[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679. As a general rule, leave to amend a complaint which has been dismissed should be freely granted. Fed. R. Civ. P. 15(a). However, leave to amend may be denied when “the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986): see Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). Iii. DISCUSSION A. Breach of Contract Claim Plaintiffs’ breach of contract claim alleges that Transamerica materially breached the policies’ terms in four respects: (1) by increasing the MDRs for reasons other than changes to its future cost expectations; (2) by increasing the MDRs in an attempt to circumvent the guaranteed minimum interest rate; (3) by increasing the MDRs in an attempt to recoup past losses and recover for shortfalls in expected revenues; and (4) by imposing excessive cost of insurance rates, including by failing to lower these rates. FAC {| 86(a)-(d). Transamerica moves to dismiss plaintiffs’ claim, in part, insofar as it 1s premised on plaintiffs’ allegations that Transamerica increased the MDRs 1n an attempt to circumvent the guaranteed minimum interest rate. Mot. at 6. To state a claim for breach of contract under California law, a party must plead: “(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011) (internal citation omitted). At the pleading stage, reviewing whether a plaintiff has properly stated a cause of action for breach of contract, we must determine whether the alleged agreement is ‘reasonably susceptible’ to the meaning ascribed to it in the complaint.” Hervey v. Mercury Casualty Co., 185 Cal. App. 4th 954, 964 (2010) (emphasis added) (citation omitted). “So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract, in passing upon the sufficiency of the complaint, we must accept as correct plaintiff's allegations as to the meaning of the agreement.” Marzec v. California Pub. Employees Ret. Sys., 236 Cal. App. 4th 889, 909 (2015) (citing Aragon—Haas v. Family Security Ins. Services, Inc., 231 Cal. App. 3d 232, 239 (1991)). Where the terms of the policy are unambiguous, the Court will not infer a limitation on defendants which 1s not supported by
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
Plaintiffs’ breach of contract claim, as pleaded in the first amended complaint, alleged that Transamerica breached the express terms of the policies “by increasing MDRs for reasons other than ‘expectations as to future cost factors’ and in order to ‘recover past losses.”” Dkt. 44 at 10. The Court concluded that, to the extent that plaintiffs alleged that Transamerica breached the terms of its policies by considering interest in setting MDRs and those policies identified “interest” as an appropriate factor that Transamerica could consider in setting MDRs, plaintiffs failed to state a claim for breach of contract. Id. at 13. Because, however, plaintiffs alleged that Transamerica breached the policies in other respects, the Court denied Transamerica’s motion to dismiss plaintiffs’ breach of contract claim in all other respects. Id. at 14.
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘197 F.3d 997, 1000 (9th Cir. 1999). For the reasons that the Court articulated in Brighton, the Court concludes that, in order to state a claim for conversion, plaintiffs in this case must demonstrate a right to immediately possess the funds in their Accumulation Values. 2. Plaintiffs Allege Right to Immediate Possession In the alternative, plaintiffs contend that “[e]ven if [p]|laintiffs were required to establish a right to immediate possession, they have that right.” Opp. at 15. That is because, according to plaintiffs, Transamerica’s universal life insurance policies “allow [p|laintiffs to access the funds in the Accumulation Values at almost any time through Partial Surrenders, Full Surrenders, and Surrender Penalty Free Withdrawals.” Id.; see also FAC 9, 105. Inresponse, Transamerica makes three principal arguments as to why these allegations are insufficient to state a claim for conversion. a. The Surrender Payment Provision First, Transamerica contends that “[iJn order to hold an immediate right of possession, a plaintiff must be entitled to possession at the time of conversion, not six months later.” Mot. at 15. Thus, because the “Surrender Payment Provision” of plaintiffs’
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘10164.2(a) (emphasis added). The Court concluded that, to the extent that Section 10164.2(a) authorizes Transamerica to “defer payment by up to 45 days from the date the surrender is effective,” the temporary delay in remitting funds does not, itself, defeat a policyholder’s right to immediate possession. Brighton, Dkt. 55 at 8— 9. Transamerica repeats that argument here—as in Brighton, the Court finds Transamerica’s argument unavailing. b. Sufficiency of Funds in Policies’ Accumulation Values Second, Transamerica contends that plaintiffs’ conversion claim fails because, according to Transamerica, plaintiffs “did not allege in the FAC that they sufficiently fund any of their Policies so that a partial surrender was available.” Reply at 16. Thus, “[i]f no funds were available to [p]laintiffs through a Partial Surrender, then it is also the case that no funds were available through a Surrender Penalty Free Withdrawal because those 3 Plaintiffs attach an exemplar policy to the FAC. See Dkt. 161-2 (“Exemplar Policy”). The Exemplar Policy’s Surrender Payment Provision indicates that Transamerica “may delay paying you the partial or full surrender values of this certificate for up to 6 months after we receive your Written Request for the surrender.” Id. at 70.
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY C. Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing Claim With respect to the policies that Transamerica issued in California, plaintiffs assert, pursuant to California law, a claim for tortious breach of the implied covenant of good faith and fair dealing. See FAC §§ 96-102. In particular, plaintiffs allege inter alia that Transamerica breached the implied covenant, giving rise to a claim sounding in tort, by: (1) “charging excessive Monthly Deduction Rates, thereby denying [p]laintiffs the benefit of their actual policy Accumulation Values”; (2) “increasing the Monthly Deduction Rates to circumvent the guaranteed minimum interest rate under the [plaintffs’] [p|olicies”; and (3) “attempting to force [p]laintiffs and other policyholders either to (a) pay exorbitant premiums that Transamerica knows would no longer justify the ultimate death benefits or (b) lapse or surrender their [p]olicies, thereby forfeiting the premiums they have paid to date[.]” Id. 4] 99(a)(d)(£). The Court notes that in its July 10, 2017 order denying Transamerica’s motion to dismiss plaintiffs’ first amended complaint, the Court determined that plaintiffs had, based on similar allegations, stated a claim for breach of the implied covenant sounding in tort. Dkt. 44 at 17-18. The Court determined that because plaintiffs alleged that “Transamerica’s MDR increase has denied plaintiffs of Accumulation Value, interest earned on its Accumulation Value, and, in essence compelled plaintiffs to pay an increase in premiums|,| . . . plaintiffs have alleged a benefit withheld that can support a claim sounding in tort.” Id. (emphasis in original). Indeed, in other cases challenging Transamerica’s MDR increases, the Court has previously sustained, at the pleading stage, similar claims for tortious breach. See, e.g., DCD Partners, LLC. v. Transamerica Life Ins. Co., No. 2:15-cev-03238-CAS-GJS, 2015 WL 5050513, at *8—9 (C_D. Cal. Aug. 24, 2015): Feller, 2016 WL 6602561, at *13. Since the Court decided those cases and since the Court issued its July 10, 2017 order in this case, however, “caselaw has developed differentiating benefits arising under the insurance component from benefits arising under the savings component of a universal life insurance policy.” Thompson, 2018 WL 6790561, at *10. For example, in AXA Equitable Life Ins. Co., another district court analyzed a similar claim for tortious breach and held that a reduction in accumulation values and guaranteed interest based upon those values relates “solely to the distinct savings component of the policies.” 309 F. Supp. 3d at 96. There, the court determined that claims premised on these allegations “arise less from the relationship between Plaintiffs as insureds and [defendant] as insurer than they do
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY investors “have no other ‘available various administrative, contractual, and tort remedies.” Brighton Trustees, 2019 WL 5784925, at *6 (citing Jonathan Neil, 33 Cal. 4th at 941). Here, plaintiffs concede in their opposition brief that they offer no new allegations which meaningfully distinguish them from the institutional investors in Brighton, to whom the Court declined to extend the tort remedy.t See Opp. at 1. To the contrary, plaintiffs “urge the Court to reconsider that ruling[.]”* Id. In support of their request, plaintiffs advance three principal arguments: “(a) denying [p|laintiffs the rmght to recover in tort would harm consumers and incentivize insurance companies to breach their policies; (b) the law entitles all policyholders to the same rights under their policies, and there is no basis for classifying policyholders such that some are entitled to assert a tort claim and others are not when the conduct complained of is the same; and (c) the Court’s ruling provides no predictable way to distinguish between policyholders that . . . are entitled to tort claims and those that are not.” Id. The Court addresses plaintiffs’ arguments in turn.
4 To the extent that plaintiffs’ claim for tortious breach is premised on allegations that Transamerica has withheld the benefits of plaintiffs’ Accumulation Values and the guaranteed accrual of interest on those accounts, plaintiffs’ argument that these funds are insurance benefits is unavailing. See Opp. at 10-11. To the contrary, the FAC specifically alleges that “although the Accumulation Value is part of the death benefit paid upon the insured’s death, policyholders do not pay cost of insurance on the Accumulation Value, which is the savings component of the Policies and not the ‘insurance.’” FAC 4 43(a) (emphases added). During the hearing, plaintiffs’ counsel requested leave to amend to including additional allegations which plaintiffs contend would clarify that Transamerica’s alleged MDR increases implicates the coverage of its insureds. Although the Court raised doubts during the hearing regarding plaintiffs’ proposed amendments, the Court cannot say, at this juncture, that allowing plaintiffs leave to file a sixth amended complaint would be futile. Accordingly, the Court GRANTS plaintiffs’ leave to amend to file a sixth amended complaint incorporating plaintiffs’ proposed amendments regarding the alleged relationship between Transamerica’s MDR increases and the coverage of Transamerica’s insureds.
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES —- GENERAL ‘224 F.3d 922, 924 (9th Cir. 2000)). And, in Jonathan Neil, the California Supreme Court indicated that extending the tort remedy is unnecessary where plaintiffs “had available various administrative, contractual, and tort remedies.” 33 Cal. 4th at 941. That is because, in those circumstances “tort remedies for breach of the implied covenant of good faith and fair dealing . . . are unnecessary to protect the insured’s interests[.]” Id. Here, the Court has already concluded that plaintiffs have, at the pleading stage, adequately stated a claim for conversion.
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY 2. Assignability of Policies and Related Claims Plaintiffs also contend that the Court should deny Transamerica’s motion to dismiss plaintiffs’ tortious breach claim because plaintiffs “are entitled to the same nghts and remedies as any policyholder,” and the Court determined in Thompson that a particular putative class of policyholders could maintain a claim for tortious breach. Opp. at □□□□ According to plaintiffs, “[t]he implied covenant does not vanish simply because an insurance policy is assigned” and “[i]f a claim for tortious bad faith is assignable, there is no reason to conclude that the mght itself and the corresponding remedies do not also transfer with the rights in the Policies.” Id. The Court previously considered, and rejected, these arguments in Bighton. See Brighton Trustees, 2019 WL 5784925, at *7. Plaintiffs are correct that an insurance contract is freely assignable. See Cal. Ins. Code § 10130. However, plaintiffs’ contention that “claims for tortious breach of the implied covenant of good faith and fair dealing are assignable,” Opp. at 8, oversimplifies the law. The California Supreme Court has “described the bad faith action against the insurer as a ‘hybrid cause of action,’ one comprised of both assignable and nonassignable components.” Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1261 (2006) (citing Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 940-42 (1976)). Accordingly, while the cause of action is assignable, “part of the damage arises from the personal tort aspect of the bad faith cause of action. And because a purely personal tort cause of action is not assignable in California, it must be concluded that damage for emotional distress 1s not assignable. The same is true of a claim for punitive damage.” Murphy, 17 Cal. 3d at 942. In contrast, Brandt fees are assignable. Essex Ins. Co., 38 Cal. 4th at 1255. That Brandt fees may be assignable, however, does not inform whether, in the first instance, California law permits an institutional investor assignee to assert a claim for tortious breach where, as here, the relevant allegations fall outside the denial of benefits, claims mishandling, or policy cancellation contexts. Considering the factors enumerated by the California Supreme Court in Jonathan Neil, the Court has already determined that, the California Supreme Court would not, in the first instance, extend the tort claim to institutional investors, like plaintiffs, who have other remedies available. Nor does the assignability of Brandt fees mean that because the Court determined in Thompson that certain policyholders could maintain a tort claim, institutional investor assignees of similarly situated policyholders, like plaintiffs, must necessarily be able to recover Brandt fees. For one, the issue of Brandt fees was not before the Court in
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6 See Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 279 (2005) (“[T]he essence of the tort of the implied covenant of good faith and fair dealing is focused on the prompt payment of benefits due under the insurance policy, there is no cause of action for breach of the covenant . . . when no benefits are due.”): Sec. Officers Serv., Inc. v. State Comp. Ins. Fund, 17 Cal. App. 4th 887, 892, 898 (1993)
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES — GENERAL ‘O’ No. 2:16-cv-08104-CAS(GJSx) Date February 10, 2020 Title EFG BANK AG, CAYMAN BRANCH ET AL. v. TRANSAMERICA LIFE INSURANCE COMPANY consider a number of factors in determining whether to extend the tort claim outside the denial of benefits, clazms mishandling, and policy cancellation contexts. See Tilbury Constructors, Inc. v. State Comp. Ins. Fund, 137 Cal. App. 4th 466, 478 (2006) (declining to extend tort cause of action based on insurer’s handling of subrogation with regard to third-party claim because “most of the factors Jonathan Neil relies upon persuade us that [plaintiff] has not stated a claim.”). Consideration of the Jonathan Neil factors, with respect to plaintiffs in this case, counsels against extending the tort claim here. IV. CONCLUSION In accordance with the foregoing, the Court orders as follows: The Court GRANTS in part and DENIES in part Transamerica’s motion to dismiss plaintiffs’ breach of contract claim, as alleged in § 86(b) of the FAC. With respect to plaintiffs’ policies that include “interest” as an enumerated cost factor, the Court DISMISSES plaintiffs’ breach of contract claim, as alleged in § 86(b) of the FAC, with prejudice. With respect to plaintiffs’ policies that do not include “interest” as an enumerated cost factor, the Court DENIES Transamerica’s motion to dismiss. The Court DENIES Transamerica’s motion to dismiss plaintiffs’ conversion claim. The Court DISMISSES plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing sounding in tort without prejudice. Plaintiffs shall file a sixth amended complaint within fourteen (14) days. IT IS SO ORDERED. 00 : 23 Initials of Preparer OM
(finding that allegations that insurer deliberately “delayed resolution of claims” constituted “ymproprieties in claims handling” which gave rise to claim for tortious breach); Jonathan Neil, 33 Cal. 4th at 941 (“There may be circumstances in which cancellation of the policy denies the insured the benefits of the policy.”).