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Rowe v. Bankers Life and Casualty Co.

September 13, 2010


The opinion of the court was delivered by: Robert M. Dow, Jr. United States District Judge

Judge Robert M. Dow, Jr.


This matter is before the Court on Defendants' motion to dismiss [54] Count I of Plaintiffs' first amended complaint. For the following reasons, the Court grants the motion and dismisses Count I of Plaintiffs' complaint. However, Plaintiffs are given 21 days from the date of this order to file an amended complaint if they believe that they can cure the pleading deficiencies identified below.

I. Factual Background*fn1

Plaintiffs, on behalf of a putative class of similarly situated individuals, brought this action against Defendants Bankers Life and Casualty Company and Bankers Life Insurance Company of Illinois, claiming, inter alia, that Defendants violated the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), (d), when Defendants fraudulently sold Plaintiffs a deferred annuity. Plaintiffs allege that Defendants, operating in part through their agents and affiliate organizations, marketed deferred annuities to senior citizens "despite the fact that such seniors are unlikely to receive any benefit from the annuity because of: the long-term nature of deferred annuity products and maturity dates * * * ; high surrender charges and penalties for early withdrawal and/or illusory bonus features[;] and rates and other product features which do not benefit annuity purchasers" (1st Am. Cmplt. ¶ 2). Plaintiffs aver that Defendants defrauded seniors by failing to disclose such material facts and risks associated with deferred annuities in their marketing materials and solicitations.

According to the complaint, Defendants implemented the allegedly fraudulent scheme through the two Defendant corporations, three affiliated corporations-KF Agency, Inc., Bankers Retirement Solutions, and UVEST Financial Services Group, Inc.-and independently contracted agents. Together, these entities allegedly constituted an "enterprise" as defined in RICO. 18 U.S.C. § 1961(4). Plaintiffs allege that Defendants conducted or participated in the conduct of the enterprise's affairs by exerting control over the independently contracted agents in various ways, including: failing to train them on the terms of deferred annuities and suitability guidelines for marketing deferred annuities; providing brochures and other marketing documentation to agents to use to "scare" potential customers about their financial security and to promote the benefits of deferred annuities; requiring agents to agree to adhere to certain sales protocols and procedures, including using the aforementioned marketing materials; requiring agents to submit any outside marketing materials to Defendants for review and approval prior to use; and requiring agents to follow scripts when soliciting potential consumers.

In addition, Plaintiffs allege that Defendants "induce[d], condone[d] and encourage[d] their Agents to engage in aggressive and predatory marketing tactics"-such as persuading consumers to liquidate other investments in order to purchase Defendants' deferred annuities- by paying them bonuses and commissions for selling deferred annuities (1st Am. Cmplt. ¶ 37). Defendants purportedly exercised further control over agents by terminating or threatening with termination agents who produced low sales of deferred annuities. Oddly, the complaint also alleges that Defendants failed to provide sufficient oversight of agents so as to restrict abusive sales tactics in which agents presumably engaged independently-an allegation that runs counter to Plaintiffs' "exertion of control" claim.

Plaintiffs allege that KF Agency, Inc.-which recruits and refers agents to Defendants- and Bankers Retirement Solutions and UVEST Financial Services Group, Inc.-which provide "investment-related transaction support" to Defendants-along with the agents and the Defendant corporations themselves, collectively constituted an "enterprise" that participated in these "abusive" sales and marketing practices. Specifically, Plaintiffs claim that KF Agency, Inc., UVEST Financial Services Group, Inc., and the independently contracted agents provided Defendants with a systematic means to control misleading information provided to potential consumers, and that Defendants' participation in the enterprise was a key factor in the perpetration of the alleged racketeering scheme.

Plaintiffs assert that Defendants used interstate mail and wire to repeatedly transmit and receive marketing materials and to process consumer applications and pay agents' commissions, in violation of the mail and wire fraud statutes. 18 U.S.C. §§ 1341, 1343. Plaintiffs claim that in so doing, Defendants engaged in and conspired to engage in a pattern of racketeering activity in violation of §§ 1962(c) and 1962(d). As a result, Plaintiffs and similarly situated class members allegedly have been harmed by Defendants' deferred annuities marketing and sales practices as well as by the penalties, loads, and fees associated with the annuities.

II. Legal Standard

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of the complaint, not the merits of the suit. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990) (citations omitted). A complaint must satisfy the several requirements of Rule 8 to survive a 12(b)(6) motion to dismiss. Fed. R. Civ. P. 8. First, the complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), such that the defendant is given "fair notice of what the * * * claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957). Second, the factual allegations in the complaint must be sufficient to raise the possibility of relief above the "speculative level," assuming that all of the allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Bell Atlantic, 550 U.S. at 555, 569 n.14). "[O]nce a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Bell Atlantic, 550 U.S. at 579-80.

Where a complaint sounds in fraud, the allegations of fraud must satisfy the heightened pleading requirements of Rule 9(b). Fed. R. Civ. P. 9(b); see also Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007) (citing Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir. 2004)). Rule 9(b) states that for "all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). A complaint satisfies Rule 9(b) when it alleges "the who, what, when, where, and how: the first paragraph of a newspaper story." Borsellino, 477 F.3d at 507 (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). Rule 9(b), read in conjunction with Rule 8, requires that Plaintiffs plead "the time, place and contents" of the purported fraud. Fujisawa Pharm. Co., Ltd. v. Kapoor, 814 F. Supp. 720 (N.D. Ill. 1993). "The purpose of this heightened pleading requirement is to 'force the plaintiff to do more than the usual investigation before filing his complaint.'" Amakua Dev. LLC v. H. Ty Warner, 411 F. Supp. 2d 941, 953 (N.D. Ill. 2006) (citations and internal quotation marks omitted).

Plaintiffs initially state that they "do not assert any claims based on fraud, nor do they ground any of their current claims in fraud." Yet, they explicitly base their RICO claim on allegations of mail and wire fraud under 18 U.S.C. §§ 1341 and 1343, respectively. Insofar as Rule 9(b) applies to all "averments of fraud," and not simply stand-alone claims of fraud, Plaintiffs' RICO claim must be viewed under the heightened pleading standard of Rule 9(b). Borsellino, 477 F.3d at 507 (citations and internal quotation marks omitted); Limestone Dev. Corp. v. Village of Lemont, Illinois, 520 F.3d 797 (7th Cir. 2008) (requiring for RICO claim "a fuller set of factual allegations" to satisfy 9(b) and to show that claim is not "largely groundless").

There is a split of authority concerning whether Rule 9(b) must be satisfied with respect to every element of a fraud-based RICO claim, or whether the less rigorous Rule 8 pleading standard applies to non-fraud elements of the claim. Compare In re Sumitomo Copper Litig., 95 F. Supp. 451, 454-56 (S.D.N.Y. 1998) (finding that RICO enterprise allegations must meet only pleading requirement of Rule 8 but wire and mail fraud allegations must meet heightened pleading requirements of Rule 9(b)); Am. Ins. Serv. v. S. Kornreich & Sons, Inc., 944 F. Supp. 240, 246-47 (S.D.N.Y. 1996) (holding that "enterprise," "control," and "conspiracy" allegations need not be pleaded with particularity); and Gubitosi v. Zegeye, 946 F. Supp. 339, 346 n.4 (E.D. Pa. 1996) (holding that "Fed. R. Civ. P. 9(b) does not require that allegations of conspiracy be alleged with particularity; only allegations of fraud have this requirement under the rule"); with Brannon v. Boatmen's Bancshares, Inc., 952 F. Supp. 1478, 1482 (W.D. Okla. 1997) (ruling that each element of RICO violation must be pleaded with particularity, citing Farlow v. Peat, Marwick, Mitchell & Co., 956 F.2d 982, 989 (10th Cir. 1992)). The Seventh Circuit has not expressly resolved the question. It has, however, explicitly applied Rule 8 to the enterprise element of RICO in at least one case. See Richmond v. Nationwide Cassel L.P., 52 ...

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