Ryan v. Salisbury

KATHY RYAN, INDIVIDUALLY, AND IN HER CAPACITY AS TRUSTEEOF THE BRODY FAMILY TRUST; Plaintiff, v. CHRISTOPHER S. SALISBURY; C. SALISBURY, LLC;CLARAPHI ADVISORY NETWORK, LLC; MICHAEL DIYANNI;AURORA CAPITAL ALLIANCE; SECURITY LIFE OF DENVER INSURANCE COMPANY;and ALEJANDRO ALBERTO BELLINI, Defendants.

CIV. NO. 18-00406 ACK-RT

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAI'I

October 17, 2019

ORDER GRANTING DEFENDANT SECURITY LIFE OF DENVER INSURANCE COMPANY'S MOTION FOR JUDGMENT ON THE PLEADINGS

This case involves allegations of a fraudulent and unlawful scheme through which Defendant Chris Salisbury ("Defendant Salisbury") and—to varied extents—the other Defendants caused Plaintiff to sustain financial losses in connection with her investments in several annuities and life insurance policies. For its role, Security Life of Denver Insurance Company ("Security Life") is alleged to have issued a life insurance policy, which was purchased through a complex "premium financing arrangement" orchestrated by Defendant Salisbury and certain other Defendants.

The Court previously dismissed Plaintiff's claims against Security Life, after which Plaintiff amended her lawsuit to allege a single cause of action against Security Life under Hawai'i's Unfair and Deceptive Acts or Trade Practices Act ("UDAP"), Haw. Rev. Stat. ("HRS") §§ 480-1 et seq. Now before the Court is Security Life's second Motion for Judgment on the Pleadings ("Motion"), ECF No. 169. For the reasons set forth below, the Court GRANTS Defendant Security Life's Motion insofar as it seeks dismissal of the sole claim against Security Life.

PROCEDURAL BACKGROUND

Plaintiff, proceeding both individually and in her capacity as trustee of the Brody Family Trust, filed a complaint (the "Original Complaint") on October 23, 2018, ECF No. 1. As against Security Life, Plaintiff asserted seven causes of action, all of which were dismissed without prejudice in this Court's May 14, 2019 Order Granting Defendant Security Life of Denver's Motion for Judgment on the Pleadings ("Order"), ECF No. 146.

Thereafter, Plaintiff amended her complaint (the "Amended Complaint"), ECF No. 158, to assert a single cause of action against Security Life under UDAP. Am. Compl. ¶¶ 61-79. Security Life filed an answer, ECF No. 160, on July 12, 2019, and then filed the instant Motion on August 13, 2019. Plaintiff filed her Opposition on September 24, ECF No. 185, and Security Life filed its Reply on October 1, ECF No. 186. The Court heard oral arguments on the Motion on October 15, 2019.

FACTUAL BACKGROUND

A detailed discussion of the factual allegations in this case may be found in the Court's May 14, 2019 Order dismissing the Original Complaint. Now before the Court is Security Life's second Motion, which seeks dismissal of the Amended Complaint on many of the same grounds. The Amended Complaint contains largely the same factual allegations previously alleged in the Original Complaint, with some additions. The Court will address those additions here, and it otherwise incorporates the factual background set forth in the prior Order to the extent that the facts are likewise alleged in the Amended Complaint.

I. Overview of Factual Allegations

The Amended Complaint involves two distinct sets of allegedly unlawful activity. Because Security Life is alleged to have participated in just one, it is helpful to begin by separating the allegations accordingly.

First, the Amended Complaint alleges that Defendant Salisbury, Plaintiff's financial advisor of many years, orchestrated a "churning scheme" designed to increase his own commissions while Plaintiff sustained significant losses. Am. Compl. ¶¶ 2, 21-39. Plaintiff alleges that Defendant Salisbury invested Plaintiff's money and/or that of The Brody FamilyTrust¹ into various annuities and then had Plaintiff surrender the annuities and move the money, all with the promise of equal or greater earnings. Id. ¶¶ 21-22. The Amended Complaint includes a non-exhaustive list of at least ten examples of annuity transactions involved in the annuity churning scheme. Id. ¶¶ 28-35. The Amended Complaint expressly does not implicate Security Life in the "annuity scheme." In fact, it clarifies that Security Life is not responsible for "Salisbury's conduct related to the annuity churning scheme." See id. ¶ 15 n.3.

That brings us to the second category of conduct, relevant to Security Life. Separate from the annuity churning, the Amended Complaint alleges wrongdoing in connection with the brokering and sale of a life insurance policy. See Am. Compl. ¶¶ 40-60. Specifically, Defendants allegedly defrauded Plaintiff by encouraging her to purchase "unsuitable" insurance that she did not need and could not afford, through an associated premium financing arrangement with negative financial consequences. See id. ¶¶ 55, 45-47, 59-60.

Security Life is alleged to have issued a $2.5 million life insurance policy (the "VOYA Policy") to the Kathy RyanIrrevocable Trust (the "Ryan Trust").² Am. Compl. ¶¶ 42, 50. The annual scheduled premium was $160,000, which, according to Plaintiff, was "well over the minimum monthly premium of $3,072.22 to maintain the policy." Id. The VOYA Policy was issued with an "excessive death benefit" that was allegedly inconsistent with Plaintiff's net worth and which she could not afford. Id. ¶¶ 45, 71. Security Life—and to some degree the Amended Complaint—attributes the value and structure of the Policy to an apparent misrepresentation in the Application as to Plaintiff's net worth. Id. ¶ 46; see also ECF No. 72-3.

Plaintiff alleges that she expressed concerns to Defendant Salisbury about the VOYA Policy's value, but that Defendant Salisbury advised her that the Policy would assist her children with payment of estate taxes after she passed away. Am. Compl. ¶ 45. According to Plaintiff, however, Defendant Salisbury failed to advise her that "very little, if any, of her net worth would be subject to estate taxes." Id. To finance the VOYA Policy, Defendant Salisbury—with the assistance of Defendants Michael Diyanni, Aurora Capital Alliance ("Aurora Capital"), Claraphi Advisory Network, LLC ("Claraphi"), and Bellini—arranged a "complex financing arrangement" under which Plaintiff was told she would never need to personally make payments on the Policy. Id. ¶¶ 42-43. The Ryan Trust wascreated instead, and Plaintiff assigned the VOYA Policy and another annuity as collateral for a loan funded by lender First Insurance Funding (now Lake Forest).³ Id. ¶¶ 3-4, 49, 51-53.

Plaintiff was later advised that the note was in default. Am. Compl. ¶ 56. Plaintiff contacted VOYA, which advised her that it could not speak to her as she was not the owner of the Policy.⁴ Id. ¶ 57. To cure the default, Defendant Salisbury allegedly instructed Plaintiff to wire $37,000 to First Insurance Funding and Lake Forest to secure the loan and avoid default, which she did. Id. Plaintiff now alleges that this payment was inconsistent with Defendant Salisbury's representation that she would not need to make personal payments on the VOYA Policy. Id. ¶ 59.

To summarize, the lawsuit alleges three primary allegations against Security Life: (1) that Security Life issued the VOYA Policy, Am. Compl. ¶¶ 42, 50, 76; (2) that Security Life was misled by Defendant Salisbury about Plaintiff's net worth, id. ¶ 46; and (3) that a representative of Security Life told Plaintiff that it could not speak with her about the Policy because Mr. Diyanni—as trustee of the Ryan Trust—was the Policy's owner, not Plaintiff, id. ¶ 57. Tosupport her UDAP theory, Plaintiff asserts that "[l]ike annuities, high dollar or 'large case' life insurance policies should only be sold to consumers when they are 'suitable' for the consumer's financial needs, situation, and goals." Id. ¶ 44; see also id. ¶ 59 (alleging that Plaintiff was harmed by the VOYA Policy and financing agreement because the Policy was "an unsuitable financial product in light of the excessive death benefit and premiums exceeding her ability to pay, which was known to Defendants at the time they initiated and/or approved the transaction").

II. Additional Allegations Raised in Amended Complaint

The annuity churning scheme and the circumstances surrounding the issuance of the VOYA Policy and associated financing arrangement are alleged in the Amended Complaint in largely the same way they were framed in the Original Complaint. The only additional allegations specifically mentioning Security Life are various agency allegations, through which Plaintiff attempts to implicate Security Life for the actions of other individual Defendants. As the Court sees it, the Amended Complaint differs from the Original Complaint in four ways:

First, the Amended Complaint alleges that the Allianz Annual Fixed Index Annuity #XXX 9437, which Plaintiff assigned as collateral for financing, has been surrendered since the Original Complaint was filed. Am. Compl. ¶ 53. Second, theAmended Complaint is restructured to allege one cause of action under UDAP, which incorporates the allegations of "unsuitability" and "Elder" status that previously made up three separate causes of action in the Original Complaint. Compare Am. Compl. ¶¶ 61-79 (first cause of action), with Orig. Compl. ¶¶ 64-90 (first, second, and third causes of action). Next, more substantively, the Amended Complaint adds two paragraphs attempting to clarify the scheme, associated misrepresentations, and legal theory related to the annuity churning scheme. Am. Compl. ¶¶ 37, 66.⁵

And finally, most relevant to Security Life, the Amended Complaint adds further allegations as to Security Life's purported liability for the actions of other Defendants. See, e.g., Am. Compl. ¶¶ 10, 16, 39, 64. In the Original Complaint, Plaintiff had broadly alleged that "Security Life of Denver is liable for its own acts and the acts and omissions of Defendants Salisbury, Diyanni, Alejandro Alberto Bellini, and/or its appointed agents who...