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DORNBERGER v. METROPOLITAN LIFE INS. CO.

March 26, 1997

SALLY A. DORNBERGER, on behalf of herself and all other persons similarly situated, Plaintiff,
v.
METROPOLITAN LIFE INSURANCE COMPANY, et al., Defendants.



The opinion of the court was delivered by: SAND

 SAND, J.

 Plaintiff Sally A. Dornberger brings this action on behalf of herself and all others similarly situated *fn1" against Metropolitan Life Insurance Company ("MetLife"), two corporate affiliates of MetLife, and various employees, officers, and directors of MetLife (collectively "Defendants"). Plaintiff alleges violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., as well as several state law claims. Defendants move to dismiss on various grounds. For the reasons set forth below, Defendants' motion is granted in part and denied in part.

  I.

 BACKGROUND

 The following factual account is taken entirely from Plaintiff's amended complaint and RICO Statement, the contents of which are assumed true for purposes of this motion.

 MetLife, a New York-based insurance company, began selling insurance policies in Europe in 1957, pursuant to an agreement with the United States Army and Air Force which allowed MetLife to sell policies to military personnel and their families. RICO Statement ("Stmt.") at 62. Unbeknownst to the military, and in violation of military regulations, MetLife began to solicit American citizens residing in various European nations who were not connected to the military, as well as European nationals. Id. Plaintiff, a British citizen residing in Switzerland, purchased two insurance policies from MetLife, one in 1991 and one in 1993, insuring the life of her husband, Paul G. Dornberger, an American also residing in Switzerland. Am. Compl. P 4. The gravamen of Plaintiff's complaint is that MetLife's European solicitations and the sales which they produced from the 1950's to the 1990's were in violation of the insurance laws of various European nations. Plaintiff alleges that Defendants were aware of this illegality, and in fact took active steps to conceal the illegal sales in order to avoid detection.

 The alleged scheme, referred to by Plaintiff as the "Overseas Operation," was carried out through the recruitment and training of European sales representatives. These representatives, unaware of the alleged illegality of MetLife's activities, worked from their homes in Europe where they "blended in" so as to avoid detection by European authorities. *fn2" Id. P 56. Detection was also avoided through multiple relocations of the Overseas Operation's offices, through frequent changes in procedures, and through fraudulent statements in New York State tax returns. Id. PP 57, 73.

 The alleged scheme was carried out through a pattern of fraudulent representations and omissions made by means of telephone marketing, mailings, advertisements, and face-to-face solicitations of prospective purchasers. Id. PP 60, 67. In the course of these communications, Defendants fraudulently failed to disclose that MetLife's insurance sales in Europe were in violation of European laws and that MetLife had never received the proper authorizations from European regulators to sell insurance. RICO Stmt. at 8. Also, Defendants fraudulently represented that local representatives would be stationed permanently in Europe to provide personal servicing on MetLife policies, with the cost of such servicing included in the premiums to be paid to MetLife. Id. at 6, 8-9. The permanent service was not provided--MetLife terminated the local representatives in 1994, allegedly in an attempt to avoid detection of MetLife's illegal sales by European authorities. Am. Compl. PP 98-106. Defendants also fraudulently represented that a 2.6% New York State franchise tax was required to be paid on all policies, and that the premiums paid by overseas purchasers would cover that tax, when in fact the tax was never paid to New York authorities. RICO Stmt. at 7-8. Defendants also fraudulently represented that the policies sold in Europe were "New York Policies" "as good as any such policies available in New York," and that the policies would be covered by the protections of New York insurance law, including the New York State guaranty fund to cover policies in the event of insurer insolvency, when in fact the policies were not covered by the New York guaranty fund. Id. at 6, 8.

 MetLife terminated its Overseas Operation in 1994-95, following various occurrences which made the illegality of MetLife's activities apparent. Am. Compl. PP 87-112. In 1989, a MetLife sales representative was arrested in Switzerland. Id. P 91. Later, British insurance regulators discovered MetLife's illegal sales and instructed MetLife to comply with applicable British regulations. Id. P 88. In 1994, Swiss regulators informed MetLife sales representatives that MetLife's sales in Switzerland were illegal. Id. P 95. MetLife placed several of its European sales representatives on "administrative leave" in 1994, and eventually terminated them. Id. PP 98-106.

 Plaintiff discovered the alleged fraudulent conduct of Defendants in October, 1995, and demanded that MetLife provide confirmation that her policies carried the same protections as all valid and legal insurance policies. Id. P 179. When MetLife failed to provide assurances as to the legality of the policies, the availability of guaranty fund protection, or the availability of local service representatives, Plaintiff ceased paying premiums and her policies lapsed. Id. P 180.

 Plaintiff filed this action in December, 1995 on behalf of all persons, excluding New York residents, who purchased polices through MetLife's Overseas Operation from 1957 forward. Plaintiff's complaint as amended asserts various claims, including RICO violations, rescission for illegality, rescission and damages for fraud, breach of contract, breach of fiduciary duty, negligent misrepresentation, and claims under N.Y. Ins. Law §§ 2123, 4224 and 4226 (McKinney 1985 & Supp. 1997) and N.Y. Gen. Bus. Law § 349 (McKinney 1988).

 II.

 DISCUSSION

 A. Standard for Motion to Dismiss

 In addressing a motion to dismiss we are required to construe any well-pleaded factual allegations in the complaint in favor of the plaintiff and to dismiss the complaint only if "'it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Gagliardi v. Village of Pawling, 18 F.3d 188, 191 (2d Cir. 1994) (citation omitted). Our function is not to weigh the evidence that might be presented at trial, but merely to determine whether the complaint itself is legally sufficient. Festa v. Local 3 Int'l Bhd. of Elec. Workers, 905 F.2d 35, 37 (2d Cir. 1990). Our consideration is limited to "the factual allegations in plaintiffs' . . . complaint, which are accepted as true, to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit." Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). In addition, we may consider the factual allegations in Plaintiff's RICO Statement in supplement to the complaint. McLaughlin v. Anderson, 962 F.2d 187, 189 (2d Cir. 1992); Pier Connection, Inc. v. Lakhani, 907 F. Supp. 72, 74 n.4 (S.D.N.Y. 1995).

 B. RICO Claims

 Defendants move to dismiss Plaintiff's RICO claims on several grounds. First, Defendants contend that application of RICO is barred by the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq. (the "McCarran Act"). Second, Defendants contend that the amended complaint fails to allege a RICO injury within the meaning of 18 U.S.C. § 1964(c). Third, Defendants contend that the amended complaint fails to state a claim for a RICO violation under 18 U.S.C. §§ 1962(a), (b), (c), or (d). Fourth, Defendants contend that the amended complaint fails to plead predicate acts of fraud with particularity as required by Federal Rule of Civil Procedure 9(b). We address each of these contentions in turn.

 1. The McCarran Act

 The McCarran Act provides in pertinent part:

 
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance . . . .

 15 U.S.C. § 1012(b). The McCarran Act was intended to permit the states to regulate the business of insurance "free from inadvertent preemption by federal statutes of general applicability." Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., Inc., 50 F.3d 1486, 1488-89 (9th Cir.), cert. denied sub nom. 133 L. Ed. 2d 335, 116 S. Ct. 418 (1995). The first section of the McCarran Act makes clear the purpose of Congress:

 
Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

 15 U.S.C. § 1011. As stated by the Supreme Court, "obviously, Congress' purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance." Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429, 90 L. Ed. 1342, 66 S. Ct. 1142 (1946). *fn3" Congress accomplished this purpose by reversing the normal rules of preemption, creating "a clear-statement rule . . . that state laws enacted 'for the purpose of regulating the business of insurance' do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise." Fabe, 508 U.S. 491, 507, 124 L. Ed. 2d 449, 113 S. Ct. 2202.

 Courts have established a four-part test to determine whether the McCarran Act precludes application of a federal statute. Under this test a federal statute is precluded if: (1) the statute does not "specifically relate" to the business of insurance; (2) the acts challenged under the statute constitute the "business of insurance"; (3) the state has enacted laws regulating the challenged acts; and (4) the state laws would be "invalidated, impaired, or superseded" by application of the federal statute. Merchants, 50 F.3d at 1489. *fn4" We now apply this test.

 a. "Specifically relates"

 The parties do not dispute that RICO does not "specifically relate" to the business of insurance. See Kenty v. Bank One, 92 F.3d 384, 391 (6th Cir. 1996) (stating that RICO does not specifically relate to the business of insurance); Merchants, 50 F.3d at 1489 (same).

 b. "Business of insurance"

 Defendants contend that the acts which Plaintiff alleges--illegal and fraudulent sales of insurance policies--constitute the "business of insurance." Plaintiff contends that Defendants' illegal and fraudulent activities, conducted outside the reach of insurance regulators, do not legitimately constitute the "business of insurance."

 The term "business of insurance" is not defined in the McCarran Act. However, the Supreme Court has set forth a clear standard:

 
The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement--these were the core of the "business of insurance." Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was--it was on the relationship between the insurance company and the policyholder.

 Various courts have held that acts of fraud or misrepresentation in connection with the sale of insurance policies come within the purview of the "business of insurance" under the Supreme Court's standard. See, e.g., Espinoza, 1996 WL 380702, at *3; Pinski v. Adelman, No. 94 C 5783, 1995 WL 669101, at *4-6 (N.D. Ill. Nov. 7, 1995); Everson, 898 F. Supp. at 543-44; Sabo, slip op. at 5-8; Wexco, 820 F. Supp. at 199-200; Gordon v. Ford Motor Credit Co., 868 F. Supp. 1191, 1194-96 (N.D. Cal. 1992); LeDuc v. Kentucky Cent. Life Ins. Co., 814 F. Supp. 820, 827-28 (N.D. Cal. 1992). These courts have reasoned that the Supreme Court's three-factor test is satisfied in such circumstances because the sale of insurance policies is the vehicle by which a policy relationship is created and by which risk is transferred, and the sale of policies is a practice which is, of course, unique to the insurance industry. We agree with the reasoning of these cases. Nothing is more the "business of insurance" than the solicitation of customers to purchase policies.

 Two district courts have taken the contrary view, espoused by Plaintiff here, that fraudulent or otherwise illegal acts can never constitute the "business of insurance." See Thacker v. New York Life Ins. Co., 796 F. Supp. 1338, 1342 (E.D. Cal. 1992); Washburn v. Brown, 1986 U.S. Dist. LEXIS 24123, No. 81 C 1475, 1986 WL 7062, at *4 (N.D. Ill. June 17, 1986). However, this view has been rejected by more recent opinions, including those of the Ninth Circuit and the Seventh Circuit, which encompass the Thacker and Washburn district courts. The Ninth Circuit in Merchants specifically rejected the Thacker approach, reasoning that such a narrow view would "read the McCarran-Ferguson Act out of existence," because "any practice which violated any federal statute would, by definition, not be the 'business of insurance,' resulting in all federal statutes applying to the business of insurance with their full vigor." Merchants, 50 F.3d at 1490. Similarly, the Seventh Circuit rejected an argument that racial discrimination in the issuance of policies is not the "business of insurance," reasoning that "it is not helpful to point to a practice forbidden by federal law . . . and observe that this practice is not itself insurance." NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 294 (7th Cir. 1992); see also Avery v. Schmidt, 1995 U.S. Dist. LEXIS 13832, No. Civ. A 93-4079, 1995 WL 562302, at *4 (E.D. La. Sept. 20, 1995) (rejecting argument that wrongful acts cannot be the "business of insurance"). We agree that it is inappropriate to conclude that illegal conduct can never be part of the "business of insurance." Rather, the proper approach is to apply the Supreme Court's three-factor test on a case-by-case basis.

 We thus conclude that the alleged conduct of Defendants comes within the purview of the "business of insurance."

 c. State law

 The parties do not dispute that the State of New York has enacted laws to regulate the type of conduct which Plaintiff alleges. See N.Y. Ins. Law § 4226 (prohibiting misrepresentations and misleading statements as to the terms and benefits of insurance contracts).

 d. "Invalidate, impair, or supersede"

 Defendants contend that application of RICO would "invalidate, impair or supersede" New York insurance law because RICO provides a different remedial and enforcement framework than New York law. In particular, there are four differences between causes of action under RICO and causes of action under New York insurance law which in Defendants' view demonstrate that a RICO action would invalidate, impair, or supersede New York law: 1) the availability of treble damages under RICO; 2) the availability of attorney's fees under RICO; 3) the availability of class actions under RICO; 4) different statutes of limitation. Plaintiff contends that RICO would not invalidate, impair, or supersede New York law because private actions for insurance fraud are available under New York law as well as under RICO, and Plaintiff asserts that mere differences in remedy are not sufficient to preclude application of a federal statute.

 This issue has resulted in a split among those courts which have addressed it. Some courts have adopted a "direct conflict" approach, which holds that a federal statute which prohibits the same conduct as state law does not "invalidate, impair, or supersede" state law, regardless of differences in procedure or remedy. This approach has been adopted by the Ninth Circuit, see Merchants, 50 F.3d at 1491-92; the Seventh Circuit, see American Family, 978 F.2d at 295-97 (assessing whether Fair Housing Act is precluded by McCarran Act); the First Circuit, see Villafane-Neriz v. FDIC, 75 F.3d 727, 736 (1st Cir. 1996) (assessing whether FDIC regulations are precluded by McCarran Act); and various district courts, see, e.g., Brownell, 757 F. Supp. at 536. This approach reasons that state and federal laws which are substantively alike but differ in penalty do not conflict with or displace each other, but merely supplement each other. See American Family, 978 F.2d at 297; Brownell, 757 F. Supp. at 536. Thus, under this approach, a federal law will "invalidate, impair, or supersede" state law only if it "prohibit[s] acts permitted by state law, or vice versa." Merchants, 50 F.3d at 1492. As the Ninth Circuit has indicated, the basis for this approach is that the McCarran Act was not intended to cede all regulatory power over the insurance business to the states:

 
The language of [the McCarran Act] is inconsistent with a congressional intent to allow states to preempt the field of insurance regulation. First, [the Act's] exemption of federal laws which specifically relate to the business of insurance weighs against a congressional intent wholly to abandon the field to the states. Second, only federal statutes which "invalidate, impair, or supersede" state insurance statutes are "preempted." If Congress had intended to cede the field, it could have said: "No federal statute shall be construed to apply to the business of insurance." Instead, it allowed federal statutes to apply unless they conflict with the state statutes . . . .

 Id.

 Other courts have adopted what may be termed an "upset the balance" analysis, which holds that a federal law may "invalidate, impair, or supersede" state law based solely on the existence of greater remedies under the federal law, even if the federal law and the state law are alike in terms of the substantive conduct which they prohibit. This approach has been adopted by the Eighth Circuit, see Doe v. Norwest Bank Minn., 107 F.3d 1297, 1997 WL 82617, at *10 (8th Cir. 1997); the Sixth Circuit, see Kenty, 92 F.3d at 392 *fn5" ; the Fourth Circuit, see Ambrose, 95 F.3d at 41 (affirming Ambrose, 891 F. Supp. 1153); and by various district courts, see, e.g., Espinoza, 1996 WL 380702, at *3-4; Everson, 898 F. Supp. at 544-45; Wexco, 820 F. Supp. at 202-04; Senich v. Transamerica Premier Ins. Co., 766 F. Supp. 339, 340-41 (W.D. Pa. 1990). Courts taking this approach have typically been faced with state insurance laws which did not provide for private rights of action, leading these courts to conclude that private suits under RICO would disrupt the administrative enforcement procedures established by state law. See, e.g., Ambrose, 891 F. Supp. at 1165; Everson, 898 F. Supp. at 544. The typical reasoning of these cases was set forth by Judge Payne of the Eastern District of Virginia:

 
RICO, which authorizes private causes of action, treble damages and attorneys fees is a powerful weapon in the arsenal of any litigant. Application of RICO to afford redress for violations of Chapter 5 [of Virginia insurance law], would invalidate and impair the regulation sought to be accomplished by Chapter 5 . . . Most aggrieved insureds would opt for the prospect of treble damages rather than participate in remedial measures structured by the SCC [State Corporation Commission]. This would make insurers less willing to agree with the SCC to settle disputes over alleged violations for fear of compromising their positions in pending or threatened RICO litigation . . . The prospect of treble damages and attorneys fees would weaken, diminish and do serious injury to, if not nullify, the sections of Chapter 5, and the enforcement mechanisms which protect and regulate that relationship.
 
. . . Because RICO provides for a private cause of action and treble damages, and because these provisions of RICO differ dramatically from the way in which Virginia's insurance code addresses the same conduct, RICO would in effect replace Chapter 5 as the principal means by which to remedy such conduct. It would convert a system of public redress into a system of private redress . . . .

 Ambrose, 891 F. Supp. at 1165.

 No court within the Second Circuit has addressed this issue. Our conclusion that application of RICO would not "invalidate, impair, or supersede" New York insurance law is therefore a matter of first impression in this Circuit.

 Initially, we note that in virtually all of the "upset the balance" cases, the state regulatory schemes at issue did not provide for private rights of action by aggrieved insureds, but instead placed the duty of enforcement upon an administrative body. See, e.g., Ambrose, 891 F. Supp. at 1165; Everson, 898 F. Supp. at 544; Wexco, 820 F. Supp. at 203-04. The reasoning of these cases was based partly on the notion that private RICO actions would disturb the limited administrative enforcement procedures established by the respective state legislatures. See Ambrose, 891 F. Supp. at 1165 (stating that private RICO actions would "convert a system of public redress into a system of private redress."); Wexco, 820 F. Supp. at 204 (concluding that private RICO actions would "upset the balance of relationships" between insurers and insureds under Pennsylvania's administrative enforcement scheme). By contrast, New York insurance law expressly permits private rights of action by insureds who are the victims of fraud. See N.Y. Ins. Law § 4226(d). Thus, the "upset the balance" cases are distinguishable. Private RICO actions in New York will not disturb any delicate "balance" in which administrative enforcement is the sole means chosen by the state to enforce its insurance regulations. *fn6"

 We accept the reasoning of the Ninth Circuit and those other courts which have adopted the "direct conflict" approach. We agree that a federal law which can be used to punish the same substantive conduct as state insurance law does not "invalidate, impair, or supersede" state law. Rather, such a federal law tends only to supplement state law by providing another vehicle by which to carry forth the substantive policies which both the federal and state laws will further. The fact that the federal law may have more flexible procedures or greater remedies is not dispositive. Rather, application of the greater federal remedies tends to further the policies which the federal and state laws share.

 Of course, there is some sense in which application of a federal law with different procedures or greater remedies may disrupt state law, simply by virtue of the fact that the federal law may punish defendants more often or to a greater extent than the state law allows. The Seventh Circuit recognized this fact in American Family :

 
Undoubtedly there is a sense in which any overlap between state and federal law upsets a balance struck by one of the two legislatures . . . One could say that a federal rule increasing the probability that a state norm will be vindicated (or augmenting the damages assessed in the event of violation) conflicts with a decision by the state that remedies should be limited or rare.

 American Family, 978 F.2d at 295. Nevertheless, the Seventh Circuit concluded that this fact does not require a conclusion that such a federal law "invalidates, impairs, or supersedes" state law. See id. at 295 (stating that "duplication is not conflict."). We agree with this approach.

 Our conclusion is further bolstered by Supreme Court and Second Circuit precedent. In National Securities, supra, the Supreme Court held that the McCarran Act did not bar an action by the SEC challenging a merger between two insurance companies, even though state insurance authorities had approved the merger. National Secs., 393 U.S. at 457-64. The Court concluded that application of federal securities laws would not "invalidate, impair, or supersede" state insurance law because the policies of the federal and state laws were compatible:

 
It is clear that any "impairment" in this case is a most indirect one. The Federal Government is attempting to protect security holders from fraudulent misrepresentations; Arizona, insofar as its activities are protected by the McCarran-Ferguson Act from the normal operations of the Supremacy Clause, is attempting to protect the interests of the policyholders. Arizona has not commanded something which the Federal Government seeks to prohibit. It has permitted respondents to consummate the merger; it did not order them to do so. In this context, all the Securities and Exchange Commission is asking is that insurance companies speak the truth when talking to their shareholders. The paramount federal interest in protecting shareholders is in this situation perfectly compatible with the paramount state interest in protecting policyholders. . . In these circumstances, we simply cannot see the conflict.

 Id. at 463 (emphasis added). This language hints at an approach which recognizes that a federal law which embraces policies that are compatible with state law does not "invalidate, impair, or supersede" state law.

 Furthermore, the Second Circuit, though it has not addressed the precise question of the applicability of the McCarran Act in the RICO context, has indicated that the McCarran Act is to be narrowly construed, especially in areas of "national concern." In Spirt v. Teachers Insurance and Annuity Association, 691 F.2d 1054 (2d Cir. 1982), vacated on other grounds, 463 U.S. 1223, 77 L. Ed. 2d 1406, 103 S. Ct. 3565 (1983), the Second Circuit held that the McCarran Act did not preclude application of Title VII, reasoning that the McCarran Act was not intended to bar enforcement of federal policies "in such fields as civil rights, labor and other areas of national concern." Id. 691 F.2d 1054 at 1066; see also Stephens v. National Distillers and Chem. Corp., 69 F.3d 1226, 1231 (2d Cir. 1996) (noting that prior Second Circuit case law "at the very least, recommends a narrower reading of the [McCarran Act]."). Racketeering activity, at which RICO is aimed, is an area of "national concern," albeit of a different nature than civil rights. Following these precedents, we favor a narrower application of the McCarran Act's preclusive effect.

 We therefore conclude that the McCarran Act does not bar Plaintiff's RICO claims.

 2. RICO injury

 Defendants seek dismissal of Plaintiff's RICO claims on the ground that Plaintiff has failed to plead injury within the meaning of 18 U.S.C. § 1964(c).

 A RICO claim requires proof of three things: (1) a violation of one of the substantive provisions of 18 U.S.C. § 1962; (2) an injury within the meaning of § 1964(c); and (3) that the injury is proximately caused by the violation. First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767 (2d Cir. 1994). Under § 1964(c), a plaintiff must be "injured in his business or property" in order to recover. This requires a showing of some actual, out-of-pocket financial loss. Id. at 768; Commercial Union Assurance Co. v. Milken, 17 F.3d 608, 612 (2d Cir. 1994). Injuries that are speculative or unprovable in nature or amount are not recoverable--recovery must wait until the nature and extent of damages becomes "clear and definite." Gelt, 27 F.3d at ...


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